British orchestras face a £33m tax bill that, if collected, could "kill them all off in one fell swoop" according to one orchestra insider. "The problem is so gigantic that literally everyone would go bust," said another symphony orchestra source.

In the case of the Philharmonia Orchestra, for instance, it could mean an extra £500,000 tax a year, plus arrears backdated to 2000. In the case of the London Symphony Orchestra, the back-payments would amount to £8m.

The liability for the tax bill is understood to have come "out of the blue" only weeks ago. Orchestras are now holding emergency meetings with Arts Council England, the Department for Culture, Media and Sport and HM Revenue and Customs (HMRC) to try to solve the crisis.

The tax bill concerns employers' national insurance contributions. Many orchestras, including the London Symphony Orchestra and London Philharmonic Orchestra, have, since their foundation, been formed entirely of freelance musicians. Thus orchestras have hitherto paid lower national insurance contributions than employers would for regular, salaried workers.

But in 1998 the government changed regulations for "entertainers" in order to benefit actors, also customarily freelancers. The idea was that their employers would pay higher levels of national insurance. The actors would then be able to claim jobseekers' allowance while "resting", the benefit being funded by the increased national insurance contributions. The unintended consequence of the reform is the orchestras' tax bill, since musicians also count as "entertainers".

But working practices differ widely between actors and orchestral musicians. "It would be insane to consider applying this to musicians," said the source.

An HMRC official has recently completed an inquiry into five sample orchestras to assess the potential impact. At a meeting with orchestras' representatives on October 20, HMRC said that making the full payments would result in four out of the five going into liquidation.

The orchestras assessed were the LSO, City of Birmingham Symphony Orchestra, Orchestra of the Age of Enlightenment, and the orchestras of English Touring Opera and Welsh National Opera.

"The Inland Revenue acknowledges the fact that faced with backdated demands ... at least 80% of orchestral companies could close," reads a letter from the Association of British Orchestras, leaked to the BBC1 Politics Show and seen by the Guardian.

However, HMRC has a policy of collecting on an "ability to pay" basis, and would not demand payments that would cause the demise of orchestras.

A spokesman for Arts Council England said the problem could be "potentially very serious" but there had been "a very constructive discussion with the HMRC". He added: "We are reassured that government understands the problem."

The main orchestras affected by the bill would be the Philharmonia, LSO and London Philharmonic Orchestra, as well as smaller ensembles such as the Orchestra of the Age of Enlightenment and most chamber orchestras. However, orchestras that employ a core of salaried permanent staff, such as the Hallé Orchestra and the City of Birmingham Symphony would also be substantially affected, since they use freelance conductors, soloists and "extra" players to boost numbers where needed.